India’s Industrial Production numbers are out and they suggest that India’s dragging economy could have been on a revival mode before the pandemic hit us, with the manufacturing activity almost doubling. Meanwhile, RBI’s Monetary Policy Committee meeting was held on 9th April and it said that collecting data due to lockdown was difficult, hence making projections even more so. Complete Coverage: Coronavirus
Crux of the Matter
Potential of Industrial Sector As per the Index of Industrial Production (IIP), India’s Industrial growth in February 2020 soared at 4.5%, a hint at the reviving Indian economy. Industrial growth in February 2019 was only 0.2%. In February, the Indian manufacturing sector saw a 3.2% growth against 1.5% in January. Mining and Primary Goods also saw a sharp rise in the month of February before the pandemic Coronavirus hit the world. Whereas, capital goods and consumer durables declined further from the negative growth it witnessed in the month of January.
Perplexed RBI The Reserve Bank of India (RBI), in the Monetary Policy Committee meeting on 9th April 2020, said that it overestimated India’s GDP growth. It had estimated GDP growth of 5.3% and 6.6% for July-September (Q2) and October-December (Q3) of 2019-20 respectively. However, India’s GDP growth rate in Q2 was 5.1% and in Q3 it was 4.7%, thereby RBI’s estimation was 0.2% (20 basis points) and 1.9% (190 basis points) more.
The downward surprise in Q2 stemmed from a stronger-than-anticipated drag from gross fixed capital formation and marginal weakness in private final consumption expenditure. In Q3, projection errors emanated mainly from a steep unanticipated contraction in gross fixed capital formation, which was the deepest in the new series of GDP.
Reserve Bank of India
In the Monetary Committee Report, RBI stated that the Coronavirus is looming over the Indian economy like a spectre. It has estimated that the rupee would hover around 75 per dollar and Indian basket for Crude oil would be at around $35/barrel. It also estimated the Inflation to be at 2.4% in Q4. The hardest hit would be the fall in aggregate demand.
Goldman Sachs projected India’s GDP growth to fall to 1.6% due to the effects of the pandemic. It had already projected India’s growth to be below 5% without the pandemic. Goldman also said that consumption activity that contributes 60% to the GDP will be badly hit because of the nationwide lockdown. In comparison, Goldman Sachs expects USA and Europe’s GDP to shrink by 6% and 9% respectively in the pandemic’s fallout.
DJIA (Dow Jones Industrial Average) traded for all-time high on 12th Feb 2020, hitting 29,551 points, although it is trading at 23,719 as of today.
While SENSEX also traded at its all-time high on 16th January at 42,059 points and then dropping to its 52 week low on 23rd March at below 26,000 points.
Pharmaceutical companies like GlaxoSmithKline, IPCA Laboratories, Cadila Healthcare, and Cipla Ltd. reached there 52 week’s highest price during the pandemic.
As also mentioned in the Union Budget, RBI has operationalised the investment by foreign nationals in select Government Securities (G-Sec). At a time when global economy has plunged into recession, this move has the capacity to mitigate the financial impact of Coronavirus. Complete Coverage: Coronavirus
Crux of the Matter
RBI announced that it is operationalising the sale of selected G-Sec from April 1 through a separate channel called ‘Fully Accessible Route’ (FAR). The Central Bank has announced that 5-year, 10-year, and 30-year bonds that are issued from Fiscal 2020-21 will be eligible for foreign investment. RBI has also removed any ceilings on investment. The following existing securities will also be opened up for foreign investment from April 1st:
7.72% Government Security 2049
7.26% Government Security 2029
6.45% Government Security 2029
7.32% Government Security 2024
6.18% Government Security 2024
Does This Come at a Right Time? As RBI invites foreign investors, Indian G-Sec Bonds enter into global bond indices. The outstanding amount of the existing securities is around Rs. 4.2 lakh crores, which could gain Indian bonds a weight of 2.5% on global bond indices. Although foreign investors have currently sold Indian bonds in order to cash up dollars, there can be a good amount of buying in the coming months. This move also comes at a time when India is fighting the Coronavirus and needs $22.6 billion (Rs. 1.7 trillion) to fund the stimulus package.
Of the total outstanding value of G-Sec of India, Rs. 60 trillion, foreigners only hold 2.7% of it. RBI has kept the cap for maximum foreign ownership at 6% of the total outstanding debt. Therefore, there is a lot of potential for India’s bond market to bring foreign investments in the country once the markets are rebounding.
The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, but it may include notes, bills, and so on. Its primary goal is to provide long-term funding for public and private expenditures. The bond market has largely been dominated by the United States, which accounts for about 39% of the market. As of 2017, the size of the worldwide bond market (total debt outstanding) was estimated at $100.13 trillion.
Participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the value of existing bonds falls, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of existing bonds rises, since new issues pay a lower yield. This is the fundamental concept of bond market volatility—changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country’s monetary policy and bond market volatility is a response to expected monetary policy and economic changes. More Info
A mammoth task on the government’s shoulder is to protect India’s ₹2.7 trillion economy that is facing the threat of shut down due to coronavirus. Markets are facing a massive demand slump. RBI has, therefore, decided to infuse liquidity into the market to cope with the slowing demand. Complete Coverage: Coronavirus
Crux of the Matter
RBI’s Measures Due to coronavirus, markets and industries across the world are facing a massive slump in demand. In India, RBI has decided to pump ₹10,000 crores into the market via Open Market Operations (OMO) – buying back government securities – to increase liquidity and monetary transmission. In addition to this, RBI has also announced up to ₹1 trillion in long-term repo operations in multiple tranches, besides a $2 billion dollar swap, in which it will buy dollars from the market now and sell it six months from now, increasing the flow of rupee in the Indian economy.
The main focus of the Government is to keep the economy running without falling into a financial crisis. The small and medium-sized businesses (MSMEs) employ more than 100 million people and account for 45% of factory output and contribute 40% of the nation’s export. Thus, the Finance Ministry has reconsidered the repay terms of borrowed loans and interest rates for MSMEs. Loan tenors for MSMEs are also extended.
NPAs Hindering RBI’s Measures On the other hand, the Indian financial sector especially banks are struggling because of high Non-Performing Assets (NPAs). Amid coronavirus threat, Indian banks are worried about a fresh spike in bad loans and thus have appealed to the government to ease the bad-debt classification criteria for the time being. The Indian banking sector is still healing from the bruises of Yes Bank debacle.
Non-performing Assets – A non-performing asset (NPA) refers to a classification for loans or advances that are in default or in arrears. A loan is in arrears when principal or interest payments are late or missed. A loan is in default when the lender considers the loan agreement to be broken and the debtor is unable to meet his obligations. More Info
Market Liquidity – In business, economics or investment, market liquidity is a market’s feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset’s price. Liquidity is about how big the trade-off is between the speed of the sale and the price it can be sold for. In a liquid market, the trade-off is mild: selling quickly will not reduce the price much. In a relatively illiquid market, selling it quickly will require cutting its price by some amount. Money, or cash, is the most liquid asset, because it can be “sold” for goods and services instantly with no loss of value. There is no wait for a suitable buyer of the cash. There is no trade-off between speed and value. It can be used immediately to perform economic actions like buying, selling, or paying debt, meeting immediate wants and needs. More Info
In a move that is being considered iconic by many, India’s Supreme Court (SC) overrodea two-year-old ban on cryptocurrency trading in the country this week. This verdict comes two years after The Reserve Bank of India (RBI) had imposed a ban that barred banks and other financial institutions from facilitating any service in relation to virtual currencies. In the ruling, the bench headed by Justice Rohinton F. Nariman overruled central bank’s 2018 circular on the grounds of disproportionality.
Crux of the Matter
Cryptocurrency: The Vault of Electronic Currency Alternatively known as a virtual currency, it is an internet-based medium of exchange which uses codes and tokens to conduct safe financial transactions. It’s most important feature is that it is not controlled by any central authority i.e it has a decentralized nature which makes it theoretically immune to the old ways of government interference.
Popular cryptocurrencies like bitcoins and litecoins can be sent directly from one party to another via the use of private and public keys. These transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by traditional financial institutions, which in turn leverages blockchain technology to gain decentralization, transparency, and immutability.
Why did RBI Hide this Crypt from Citizens ? In April 2018, RBI reportedly wanted to curb “ring-fencing” of the country’s financial system. It had also argued that Bitcoin and other cryptocurrencies cannot be treated as currencies as they are not made of metal or exist in physical form, nor were they stamped by the government.
The central bank notice had sent several local startups and companies into panic mode as they were actively offering services to trade in cryptocurrency. A group of petitioners including a trade body, the Internet and Mobile Association of India, had challenged this decision. They argued back then how this move would put a brake on the nation’s digital progress when countries like US and China were not only involved in cryptocurrency trading but also launching their own virtual currencies.
Now that Virtual Laxmi is Back, Is She Welcomed? Even if many startups have had to shut shop since the RBI ban, others survived the storm to even attract M&A interest. Now they are planning to restart work with the regulators in order to create a better framework and improve the presentation in the draft cryptocurrency bill.
Nischal Shetty, founder and chief executive of Bitcoin exchange platform WazirX, is overjoyed as his twitter handle reads, “Crypto has won in India. We can now innovate. The entire country can participate in the Blockchain revolution.” He adds that India will now see 100 crypto new startups in the next few months, along with VC investments, better jobs and a real contribution to the economy.
Bitcoin(₿) is a cryptocurrency. It is a decentralized digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain. Bitcoin was invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto and started in 2009 when its source code was released as open-source software. Bitcoins are created as a reward for a process known as mining. They can be exchanged for other currencies, products, and services. Research produced by University of Cambridge estimates that in 2017, there were 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using bitcoin. More Info
Yes Bank has sunk into a crisis since March 2019 after the appointment of new Chief Executive Ranveet Gill who exposed the stressed balance sheets and bad debts in loan of the Bank.
Crux of the Matter
What is the Crisis? Yes Bank got caught up in financial crisis after it failed to raise capital to compensate loan losses. The bank witnessed a steady decline, resulting in downgrades, triggering the invocation of bond covenants by investors, and withdrawal of deposits. RBI considered poor governance and unfair practices to have fueled the fall of the financial status of the Bank. Bank schemes also failed to lure creditworthy potential investors, who could have balanced the losses accrued due to bad loans. Amount of financial stress sums to Rs. 10,000 crores. Further, the bank’s share price has fallen up to 90% as of today after the appointment of the new Chief Executive, who was expected to anchor the bank into good times. Its stock soared at Rs. 393.20 as of 17 August 2018. Whereas as on 06 March 2020, the stock hovered around Rs. 15 only.
Due to crisis, RBI imposed a moratorium on the withdrawal of money, restricting the amount up to 50,000 only. The central bank stated that it decided to put moratorium after looking at the condition of the Bank and the absence of a credible revival plan. This is the only partial solution as of now which can save the interest of the bank’s depositors.
The Reserve Bank assures the depositors of the bank that their interest will be fully protected and there is no need to panic.
State-owned Companies, Savior of Yes Bank The government has knocked on the door of public giants, SBI and LIC to buy the shares of Yes Bank to save it. SBI and LIC are set to buy 49% of preferential shares at a cost of 2 rupees per share. Both stated-owned firms are likely to acquire their shares, paying a sum of Rs. 490 crores. If this deal happens, then it will be the first time when a state-owned firm would have jumped to rescue a private bank.
The central bank has appointed ex DMD and CFO of public-lender State Bank of India (SBI) Prashant Kumar as an administrator. He will look into the matter and will work to stabilize the situation. The board of the bank is on hold for 30 days, for taking any actions. It clarified that as of now, the bank has received no official information from Government, RBI or SBI about purchasing its shares.
The government has strategically used SBI for investing and backing up the crisis-hit bank. In today’s market where companies’ governance and the quality of companies matter most for an investor, a company with private and public equity will have more credibility.
SBI’s support comes at a time when it’s SBI Cards IPO is on sale. Carlyle group that bought a 26% share in SBI Cards in 2018 is set to gain tremendously as SBI Cards is expected to value somewhere around Rs. 70,000 crores, a valuation that might provide 7x-8x profit to Carlyle group’s 10% dilution.
Yes Bank Limited is an Indian private sector bank, founded by Rana Kapoor and Ashok Kapur in 2004. It primarily operates as a corporate bank, with retail banking and also asset management as subsidiary function. It derives most of its revenue through arranging syndicated loans and through corporate banking. It operates as three entities – Yes Bank, Yes Capital, and Yes Asset Management Services. In September 2016, it scrapped its proposed $1bn share sale due to market conditions. The pull out of the deal caused all-round embarrassment as miscommunication and misunderstanding among various players led to a round of public blame game among various participants. The company subsequently attempted to relaunch its failed capital raising exercise after appointing a new set of bankers. More Info
Bond Covenant – A loan covenant is a condition in a commercial loan or bond issue that requires the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions, or which possibly restricts certain activities to circumstances when other conditions are met. Typically, violation of a covenant may result in a default on the loan being declared, penalties being applied, or the loan being called. The legal provision in the loan agreement providing for the loan to be “called” is the “Acceleration Clause”: once the buyer defaults, all future payments due under the loan are “accelerated” and deemed to be due and payable immediately. More Info